Prior to entering into an activity with a donor, it is critical that the nonprofit entity understands what qualifies as an agency transaction. In order to determine if an event meets the agency transaction requirements, the nonprofit must first and foremost understand the terms of the agreement with the donor. There are a few questions that must be considered: Does the donor specifically state who will be the beneficiary of the assets? Has the nonprofit entity agreed to solicit assets on behalf of the beneficiary? Can the nonprofit entity make distributions for the beneficiary? Has the donor granted the nonprofit entity variance power?
According to the Accounting Standards Codification Topic 958, Not-for-Profit Entities--Revenue Recognition –Transfers of Assets to a Not-for-Profit Entity or Charitable Trust that Raises or Holds Contributions for Others (Subtopic 605-25), an agency transaction occurs when a nonprofit entity “accepts assets from a donor and agrees to use those assets on behalf of or transfer those assets, the return on investment of those assets, or both to a specified beneficiary.” Additionally, a nonprofit entity “acts as an agent for and on behalf of a beneficiary if it agrees to solicit assets from potential donors specifically for the beneficiary’s use and to distribute those assets to the beneficiary.” Lastly, a nonprofit entity also “acts as an agent if a beneficiary can compel the entity to make distributions to it or on its behalf.” All of the situations noted above have a commonality whereby the agent is considered to be an entity that acts for and on behalf of another. On the contrary, if, as part of the agreement, the donor explicitly stipulates that the nonprofit recipient entity has the ability to redirect the use of the transferred assets to another beneficiary without having to gain approval from the donor (i.e., variance power), the event is not considered an agency transaction, and the nonprofit entity is not considered a donee and not an agent.
The final question is then, what is the accounting treatment if an agency transaction exists? In this situation, the nonprofit entity should recognize a liability to the specified beneficiary and the cash or financial asset(s) received from the donor. If the situation arises where it is determined that the nonprofit entity receiving the donation holds variance power, the nonprofit entity at that point would record the assets received and contributions revenue.
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